Ask HN: My CEO has been "stealing" money from the company, what should we do?
We're a startup at the pre-seed stage, me and another co-founder just recently found out our CEO has been instructing our third-party accountant to issue themselves advance payroll for like 13 weeks, while we only have roughly 8 weeks of runway left.
They never told us or discussed with us about the payroll advance, would this be considered as fraud or stealing money from the company? Would this also breach the shareholder agreement? And if so, what are the actions that we can take?
We certainly want them out for good due to their dishonest actions and in-actions at work.
FYI, we are all equal shareholders, and we just passed our 1-year cliff, with a 4-year vesting schedule.
--- Edited to add more context here ---
We are currently in a pre-seed program in a relatively large VC firm, and we are about to pitch to our head investor in a few weeks for our seed round. Thus, we have a narrow time window to make an action, and we definitely don't want to blow up our chances with our investor. If you've got 8 weeks of runway left, you're dead in the water regardless. You should be spending time looking for a new opportunity, not trying to police the CEO of your failing startup. Like is what they're doing right? Is it legal? Can you do anything about it? All interesting questions, but, none of the answers are going to meaningfully change your situation. To get reliable legal advice, you should be asking a lawyer, not random people on HN. There are lawyers on HN, and to the extent they can help OP ask the right questions, it could help keep the legal costs down. To lower legal costs, ask an Internet forum of randos, including possibly lawyers? That's terrible advice. It wouldn't be what I would do, but then again I'm a former lawyer with many friends who are lawyers. But if the best OP can do is get some preliminary advice from Hacker News, it's worth giving it a shot. What would you suggest OP do instead of asking HN? If you are a former lawyer, what would you advise OP to do? If I were a former lawyer, I wouldn't give any advice other than general knowledge. e.g. "Could you sue on behalf of the shareholders of your CEO's embezzlement and win? Maybe? Should you? I don't know, I'm not your attorney, and I haven't studied any of your claims." That's about as worthless as it gets. It doesn't take a lawyer to know that a shareholder lawsuit to recover 13 weeks of pay is not going to make financial sense. Our intention is not to recover the 13 weeks of pay, but we would rather let them keep it, and remove them from the company being that's the "pay out" they get for their shares. Although, we are trying to understand if this could be considered as fraud so we can remove them with a legally solid reason, and confiscate their shares. Sounds more like embezzlement than fraud, but a key question will be what powers the CEO that don't require shareholder votes. For example, if an employee came to him and asked for 2 weeks of pay advance due to some emergency, could he grant it unilaterally? Obviously it's different since there's a conflict of interest when he's doing it for himself, but it's still a relevant data point. Check your bylaws to see if this sort of thing is spelled out. See my questions and comments below. Given that alternative, which is leaving the money to the CEO, I agree with OP's approach. Edit to add: feel free to email me (address is in my profile) if you'd like to discuss this with someone in private. I've co-founded multiple startups, but don't have any experience with a bad situation like this, so could give general perspective only, but if you just need someone to talk to I can be that person. --- The first question to ask is, what would you like to see happen? Considering the short runway and the apparent problems with the CEO, do you see value in the company and would you like to keep it alive? Are you ready to write it off, and you just want to manage the endgame to ensure that yourselves, other employees (if any), customers (if any), investors, or other parties are treated fairly? Is there some other outcome that you'd like to optimize for? Separately: who are the members of your board? I've never dealt with a situation like you're describing, but at a high level I imagine you have basically three channels for action: 1. Call a board meeting, fire the CEO. 2. Legal action. I'm not sure whether this sort of action is something you could sue over, something you could ask the police to press criminal charges for, both, or something else. Consider, however, that filing a lawsuit is expensive, and it's not obvious to me that either of these actions would benefit you in any practical way (aside from revenge, if you're looking for that). 3. "Soft power" – threaten to do (1) or (2) above, or to quit, or do other things, in order to coerce the CEO into leaving / behaving better / whatever else you'd like to see. One other note: while I'm off the edge of my experience and expertise here, I can imagine possible scenarios where you could wind up in legal trouble if you're not careful. (For instance, if you're on the board and fail to take appropriate action now that you're aware of the problem?) You might want to consult a lawyer for this reason alone. Being a whistleblower is thankless (except for the people you help) and dangerous. That doesn't mean you shouldn't do it, but be aware of the dangers. Talk to a lawyer and be sure he/she agrees that your information is lawyer-client privileged. That might mean signing a retainer agreement with them. > our CEO has been instructing our third-party accountant to issue themselves advance payroll for like 13 weeks Does this mean that for the last 13 weeks they've been one week ahead, or something else? How much does the CEO's advances affect your 8 weeks of runway? In addressing this situation, I'd be mindful of the fact that the company won't exist if you run out of runway spending all your time on this issue. It's a frustrating situation, but legal bills can eat up runway pretty fast. The best possible outcome is to get some lawyer friends to help you figure out a slam-dunk case and get the CEO out without protest. But IMO (as a founder and former SV lawyer), this is pretty unlikely. Sorry for the confusion - they have advanced their payroll for a total amount of 13 weeks (accumulated through multiple pay stubs), while they have requested still getting paid weekly like the rest of us. So their behavior seems like they are trying to max out the values before they check out. Their advances will probably last us another 2 weeks, and we only have 8 weeks of runway left because we are at the end of our pre-seed incubation program, and we are about to raise our seed round with our lead investor in a few weeks. I can't agree more that this will eat up our time and resources very fast, but we also want them out before we pitch to our lead investor for the seed round. We have already spent a week investigating this issue ever since we noticed something wrong, so we have a very narrow time window for us to take actions, ideally by early next week. Thanks for clarifying. Where did your funding come from, and are those funders aware of the situation? I would tend to agree with others that you may just need to start over. Of course, you want to make sure the CEO is out of this entity, so that he/she doesn't later claim that NewCo appropriated technology/IP from OldCo, and that he/she is owed a chunk of NewCo. The majority of our pre-seed funding comes from a US-based VC firm with an uncapped SAFE. And our investors haven't been made aware of the situation yet, but we are thinking about informing them on Wednesday this week. Thank you very much for the suggestion, we have also thought about starting a new entity, but we are not so sure on how to transfer our assets (SAFE note, domain, IP, employees, customers, code bases, etc) to the new entity, and how this would affect the relationship with our existing funders. What do you think the pros and cons would be? I would suggest talking with your funder ASAP. They will know how to deal with this and will be motivated to help. They can also pressure the CEO in a way that you cannot. It may blow things up, but I think it's your best chance at survival. Just my 2¢ as a guy on the internet with an opinion! I mean… I think you should assume there will be no seed round for this company as it’s currently incorporated. Your incubator program should really be working through this with you though. Obviously the right answer here is to get a lawyer and ask them. In lieu of that for whatever reason, I’d confront the CEO and say you know about his actions and will spend the rest of the company’s money to sue him unless he returns $x, gives up all his equity, and resigns. If he declines this offer you should probably just quit and notify your investors and let them deal with it. Be prepared to just call it quits, set everything to zero, and start over though. I would talk to a lawyer and then approach the VC but actions like this (embezzlement) especially at such a crucial stage could kill what you've started. Sorry for the bad news. I think the word is "embezzlement". And it is a financial crime. If you are really equal co-founders, then you should confront the CEO and accountant and fire them both. If you can't do that, then you never were equals. From the information you provided, it is obvious that the CEO is a dishonest person and would be an even greater liability in the long term. Feels like this guy is signaling their CEO to stop stealing... If you have documented proof this is happening, you should send this to a news organization. How many co-founders are there? Is the CEO a co-founder?